Abstract
<title>Abstract</title> <p>This paper develops a spatial overlapping generations (OLG) framework that integrates environmental externalities, endogenous human capital accumulation, and inter-regional knowledge spillovers to analyse regional growth dynamics across European NUTS-2 regions over the period 1995–2025. Departing from earlier non-spatial OLG models, we embed spatial interaction through a row-normalised contiguity weight matrix, allowing pollution damage, human capital diffusion, and technology transfer to propagate across neighbouring regions. The theoretical model yields an interior balanced growth path (BGP) whose existence and uniqueness are established under standard regularity conditions; closed-form expressions for the steady-state capital stock, environmental quality, and inter-generational welfare are derived. Empirically, we estimate a hierarchy of spatial panel models—spatial autoregressive (SAR), spatial error (SEM), spatial Durbin (SDM), IV-GMM with spatial instruments, and System-GMM (Blundell–Bond)—on an unbalanced panel of approximately 240 NUTS-2 regions. Our findings indicate that a one percent increase in the TFP index raises GDP per capita by approximately 0.33–0.40 percent through direct channels and an additional 0.18 percent through spatial spillovers. Human capital generates the largest total effect (≈ 0.73), confirming the centrality of inter-regional knowledge diffusion in driving European convergence. Carbon emissions exert a significant negative direct effect of −0.12 and a smaller but statistically robust indirect effect of −0.09, consistent with transboundary environmental damage. Results survive extensive robustness checks across alternative spatial weight matrices, sub-periods, sub-samples, and placebo tests. Policy simulations suggest that a combined human capital investment and environmental quality programme can raise long-run welfare by 4–5 percent relative to a no-policy baseline. JEL Classification: C23; O15; O44; Q53; R11; R12; R58.</p>